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October 2010

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Keeping It Real

A family of high-precision components made by Tucson aerospace cluster star Sargent Aerospace & Defense.

Photo courtesy of Sargent

A new report says clusters are the way to muster an economic recovery. Some areas already knew that.

by ADAM BRUNS

W

hat do you think about when you hear the word "cluster"? The fruit of the grapevine? A distant but promising family of stars? A profane epithet? A sweet concoction built around a few nuts?

All of the above may apply at one time or another when it comes to the identification and cultivation of industry clusters.

The term has been around for two decades now, thanks to its introduction into the lexicon by Harvard Business School Prof. Michael Porter. But now a bipartisan slew of candidates for office, and the federal government itself, are reviving the cluster buzz with lots of talk and a fair bit of funding, led by the Energy Regional Innovation Cluster that just directed $129 million toward Philadelphia from seven different federal agencies.

Two weeks ago the Brookings Institution's Metropolitan Policy Program released the report "The New 'Cluster Moment:' How Regional Innovation Clusters Can Foster the Next Economy," by Mark Muro and Bruce Katz. The think tank also convened a forum on the topic that featured U.S. Commerce Secretary Gary Locke, U.S. Agriculture Secretary Tom Vilsack, Eli Lilly and Co. Chairman, President and CEO John Lechleiter; National Economic Council Deputy Director Jason Furman and Special Assistant to the President for Urban Affairs Derek Douglas. It also featured representatives of the Center for American Progress, the Council on Competitiveness, and the National Association of Development Organizations, as well as community leaders from such cluster-laden territories as northeast Ohio, Indiana, Maine, Vermont and Colorado.

How many clusters are there? The European Cluster Observatory says there are some 2,000 in Europe, supported by 1,300 initiatives. Japan's Industrial Cluster Project and Knowledge Cluster Initiative poured the equivalent of $300 million into that nation's 102 industry clusters. The Brookings report says cluster policies are in place in such nations as Norway, Switzerland, Turkey, Iceland, and Israel. And its new report, in footnote No. 30, says, "in correspondence on August 25, 2010, Dr. Christian Ketels of the Institute for Strategy and Competitiveness' Cluster Mapping Project and the European Cluster Observatory suggested a lower bound of 150 active cluster initiatives in the U.S., based on information from a 2005 survey."

Money Begets Buzz

They're nothing new, but clusters are receiving renewed attention and government funding in the U.S., in part, say Muro and Katz, because they represent real, dynamic business activity taking place — not hoped-for scenarios.

"I'm speaking against the disembodied account of how innovation occurs that says if you just pour in some R&D and get some scientists together, jobs will result," says Muro, senior fellow and policy director for the Metropolitan Policy Program at Brookings, in an interview. "That's the 'black box' view. But my attack also gets at hoped-for clusters that in fact have little real basis in a true competitive analysis that examines the relative market positioning and global traction/growth prospects of the national and local industry. So this is every place that wants to be a bio or solar hub regardless of a good grasp on what it has now."

Muro says state and regional data, like the federal kind, can be extremely varied in its quality. It needs to be the opposite.

"The cluster paradigm argues first and foremost that you need to rigorously analyze your industrial profile. Understand what you have, what's growing, what it connects to. Information is extremely important to forming policy, and to business leaders. Some of the strongest cluster initiatives have data as the key tiller."

There's real money involved. While the Obama administration's FY 2010 request of $50 million for an EDA cluster program was trimmed by Congressional appropriators, Muro and Katz note that the FY 2011 proposals now before Congress "treat regional industry networks less as a 'program' and more as an operating system for multiple activities and a means for linking and aligning multiple federal interventions to maximize their impact in support of regional prosperity." Among the proposals in play, report the Brookings authors:

The EDA's proposed $75 million Regional Innovation Clusters program would provide regional planning and matching grants focused on leveraging regions' competitive strengths to boost job creation and economic growth. Among the looming projects is a $1.5-million contract to execute an innovation cluster map of the U.S. The Brookings report emphasizes the strong role that accurate and updated data can play in helping clusters propagate.

The Small Business Administration (SBA) would support EDA's cluster effort by directing a proposed $11 million toward promoting greater small business participation in regional clusters by better coordinating its resources for business counseling, training, and mentor-protégé partnerships.

The Department of Labor (DOL) would use its newly proposed Workforce Innovation Fund (of up to an estimated $108 million) to help ensure that the workforce development system also aligns with regional cluster growth by facilitating regional collaboration among training and employment services providers and stronger linkages with employers so that worker training leads to good jobs.

A regional innovation clusters section was included in the America COMPETES Reauthorization Act of 2010, which passed the House in June and the Senate Commerce, Science and Transportation Committee in July.

Meanwhile, at the state level, the authors observe that 2010 candidates for office from both major parties — such as Democrats John Hickenlooper of Colorado and Andrew Cuomo of New York and Republicans Bill Haslam of Tennessee and Rick Snyder of Michigan — have suggested tailoring state strategies to distinct business clusters.

"In sum, the year 2010 represents an important juncture for U.S. economic

Development," write Muro and Katz. "On display are a series of new initiatives that assume that the American economy is regional; that regional industry networks and clusters are a defining aspect of its organization; and that clusters of firms and other actors and their interactions are a proper object of national economic policy."

Density Breeds Dollars

While many are familiar with the most famous cluster models, when asked to name a few more recent or under-the-radar examples of strong cluster mapping and cultivation, Muro points to the energy efficiency cluster tracked by the Puget Sound Regional Council in Seattle; JV Silicon Valley; CONNECT in San Diego; NorTech and the Fund for Our Economic Future in northeast Ohio; BioCrossroads in Indianapolis; and the smaller, more rural cluster programs run by the Maine Technology Institute.

The cluster focus falls in line with recent Brookings research calling for more pronounced support of the nation's cities.

"In 2008, for example," write Katz and Muro, "the 100 largest metropolitan areas in America concentrated 74 percent of the country's college graduates, 75 percent of workers with graduate degrees, 82 percent of NIH and NSF research funding, and 96 percent of all venture capital funding." What's more, when it comes to clusters, they assert, "while the 100 largest metropolitan areas in America contain 12 percent of the nation's land mass and two-thirds of its population and jobs they generate 75 percent of the nation's output, 78 percent of all patents [and] 85 percent of all new firm starts."

Coming in at No. 52 on that list of MSAs is Tucson, Ariz., where the population has surpassed the 1 million mark thanks to population growth of over 20 percent since the 2000 census. Tucson Regional Economic Opportunities, the regional economic development agency formed five years ago, is charged by its blueprint to focus on the clusters of aerospace and defense, bioscience, solar, and transportation and logistics.

"The industry clusters here are very consistent with the research strengths of the university," says Bruce Wright, associate vice president of the University of Arizona's Office of University Research Parks.

Asked which schools are doing the best job of making economic development their mission and forming true industry partnerships, Muro says MIT is always the Holy Grail. But there are others. "I think UC-San Diego is strong," he says. "So is the University of Akron and Arizona State University." That last school, in fact, administers a continuing education program in engineering called JACMET (Joint Alliance of Companies Managing Education for Technology) that southern Arizona companies such as Raytheon and even the rival school in Tucson have taken part in for the past 16 years.

The U. of A.'s Science & Technology Park is capitalizing on those existing strengths by looking more closely at sub-clusters. To wit, the park and its companies are moving toward a Border Security and Technology Commercialization Center (BSTCC). Complementing a center supported by a Dept. of Homeland Security (DHS) grant awarded three years ago to the U. of A. and to UTEP in El Paso, the project is about establishing a third-party testing and deployment center for all stripes of security- and border-related technology, including a 25-acre (10-hectare) site to simulate a variety of border crossing scenarios.

"If we're going to live with the border day to day and all its problems and issues, why shouldn't we get the economic benefit from it?" says Wright during a meeting of park constituents and tenants, which include in their number Alion, Darling Environmental & Surveying Ltd., and Dilas, a developer of high-powered diode lasers.

Small Yet Global

Asked whether the trend toward smaller, more nimble companies might be paralleled by smaller critical mass required to define a given cluster, Mark Muro says by and large clusters retain characteristics driven by industries and

supply chains, which by their nature turn into larger footprints once they reach the stage of mass scale production. That said, smaller clusters may form "in some areas where there are super-refined specific activities, often earlier stage activity at the innovation end, where smaller collectives of people can get a lot done."

Then he makes another observation meaningful to cluster surfers:

"To some extent, clusters are becoming pieces of larger systems scattered around the world," he says, for instance a cluster only doing the design end in a global system. "You might have the de-scaling of the mass production activities, and be focused on small nimble groups doing early stage invention." He cites Indiana's BioCrossroads — "You have these large firms like Lilly, but then there's this cloud of small, super-high-end inventors and innovators that cluster around that. But you could imagine some of that persisting without the Fortune 500 companies. I can't say I observe a particular drift in this direction, but it's true that supply chains are refining and fragmenting."

In fact, another smaller cluster in Arizona was cited at the Washington cluster forum by Derek Douglas, special assistant to the president on urban and metropolitan issues:

"In Flagstaff, they've woven together public and private resources to cluster and incubate emerging technology businesses like wind, biotech, and solar power," he said. "When we were in Flagstaff, we met with leaders from Northern Arizona University and the Northern Arizona Center for Emerging Technologies, which is the business incubator funded in part by a $2.5-million EDA grant that was matched by the city. That funding helped to leverage over $30 million in private funds, and in a short period of time NACID, the incubator, incubated 11 companies, and created 80 high-wage jobs with an average wage of approximately $90,000."

Back in Tucson, partners in the BSTCC include Alion and the Bi-National Sustainability Lab in Santa Teresa, N.M. Possible funding sources include several federal agencies. Meantime, the fruit of such a sub-cluster focus was evident last week when international surveillance and communication system firm Aria International announced it would move its headquarters from Virginia into the Tech Park, with its first day of operations there on October 15. The company will occupy 3,000 sq. ft. (279 sq. m.), employing 10 full-time employees and eight independent contractors. Mike Crosby, Aria's CEO, says the park's efforts with the BSTCC were a key factor.

"We intend to develop university research partnerships, leverage existing international partners, as well as key industry and federal relationships. All of these relationships will contribute to our efforts as we continue to further develop public-private partnerships for the implementation of border security solutions around the world," he said in a news release.

At the table in Tucson, he explains that the company overall is contract-driven, and after shrinking somewhat at the beginning of the year, now has 62 requisitions out for new independent contractor hires. "We expect we'll be at about 150 employees in about a year," he says. Among the projects Aria is working are airship- and aerostat-related surveillance projects in Thailand, India and the UAE. He also plans to make inroads into the inbound shipping container scanning business, as the July 2012 deadline from DHS requiring all incoming containers to the U.S. to be scanned is fast approaching, and has many of the world's port authorities concerned.

Growth in the Desert

Across Tucson in Marana, another cluster resident is growing, as Sargent Aerospace & Defense, a company within Dover Corp., announced in June that it will add a 70,000-sq-ft. (6,503-sq.-m.) facility to its existing complex, a former cabinet manufacturing plant it has occupied since 1990. The new project, which will more than double the current work space, will enable company leaders to redesign and streamline work flow for its range of products that include actuators, bearings and fasteners for defense customers, as well as a who's who of aerospace companies. The company also supplies super-quiet hydraulic components for submarines, and performs some work for intermodal trains as well.

"Our decision to expand in the greater Tucson region, specifically Marana, was driven by a need to retain a strategic location with a culturally diverse employment base. Being close to California and Mexico allows us access to both key aerospace suppliers and our existing manufacturing plants via a well-established transportation network. Southern Arizona provides long-term value while maximizing productivity and supporting our growth plans," said Scott Still, president, Sargent Aerospace & Defense.

During a plant visit, John Carpenter, Sargent CFO, explains that Tucson was chosen over plants in Franklin, Ind., and Torrance, Calif., for the expansion. The company also operates plants in Greater Montreal and in Guaymas, Mexico. Carpenter says the aim is to establish an engineering center of excellence in Tucson, as well as consolidate some shared services functions.

"We partner with the University of Arizona pretty extensively with engineering projects," says Harry Labbe, plant manager for Sargent.

"The graying of the aerospace industry is a real problem," explains Wayne Schramm, the company's director of engineering. "There are very few who really know the business anymore. So there's real strength in partnering with the U. of A. — internships, capstone projects. It brings in new blood. Because recruiting from competitors is nearly impossible, and costly. U. of A. has a really strong aerospace and mechanical engineering department. It hasn't been difficult for me to recruit people out of there."

"As Marana's largest, private, non-retail employer, Sargent has been a cornerstone of our community for nearly twenty years. This project will be a top priority and fast-tracked through the development process," said Ed Honea, Mayor of Marana.

Topping off the Tucson news, Joe Snell, the CEO of TREO, announced at the organization's annual luncheon on October 1 that yet another Tucson industry cluster, biotech, will see an announcement within the next few weeks that will have a $600-million economic impact and create between 400 and 500 jobs, at an average salary of $75,000.

Seems the folks in Tucson have done their think-tanking already. And they know where their bread is buttered. Joe Snell put an exclamation point on the role of primary industry in cluster creation when calling attention to his region's largest employer, Raytheon Missile Systems.

"Raytheon puts $3 billion into the economy annually, and employs 12,500 people," he told an applauding audience. "It indirectly employs tons of vendors and suppliers, which trickles down to a lot of smaller businesses. The recession has really helped clarify this. It's time that we prioritize and give preference to those industries that produce the greatest returns for our future."

After all, every solar system needs a sun.

Story in Pictures

Mark Muro, senior fellow and policy director for the Metropolitan Policy Program at Brookings Institution

Heart of the Matter

T

he following, taken directly from their report, are the six principles that Brookings Institution authors Bruce Katz and Mark Muro say should govern policy decisions when pursuing cluster-based economic development strategies:

Don't try to create clusters. Clusters can't be created out of nothing and cluster initiatives should only be attempted where clusters already exist. The pre-existence of a cluster means that an industry hotspot has passed the market test. By contrast, efforts at wholesale invention will likely be fraught with selection issues, inefficiency, and probable failure and waste.

Use data and analysis to target interventions, drive design, and track performance. Cluster strategies or policy interventions — when attempted — should be grounded in rigorous empirical information and analysis so that decision-makers can make objective assessments about the nature, competitive prospects, and specific needs of different regional industry concentrations. Cluster strategies also need to be held accountable so performance measurement is critical.

Focus cluster initiatives on clusters where there is objectively measured evidence of under-capacity. Work to upgrade an identified cluster should be tightly focused on attacking specific, documented constraints, institutional deficiencies, or resource shortcomings.

Maximize impact by leveraging cluster-relevant preexisting approaches, programs and initiatives. Specific, targeted cluster-oriented initiatives are clearly justifiable, but equal value and added impact may well come from drawing other, more generally relevant programs into the cluster orbit. For example, at the federal level programs like the R&D tax credit as well as SBI and SBTT grants, work-force training programs, and small business finance may all be rightly viewed as "cluster" programs, just as banking regulations, tax credits for venture capital, and education policy may be at the state level.

Align efforts "vertically" as well as horizontally. The cluster paradigm can — and should — be used to organize the disconnected policy offerings of any one level of government in service of clusters' needs in a region, but it also provides a framework for coordinating them up and down the tiers of federalism to avoid policy conflict, redundancy, or missed opportunities for synergy.

Let the private sector lead. Clustering is a dynamic of the private economy in the presence of public goods. Cluster strategy should be pursued with humility as a matter of supporting, connecting, filling gaps, and removing obstacles to private enterprise while making sure certain public and quasi-public goods are available.

Clusters of Program Dollars Seek Projects

The following programs are highlighted in Brookings' new innovation clusters report:

Represents a new cross-agency framework for federal economic development assistance to target and align funding to well-developed regional strategies that prioritize institutional collaboration and leverage core regional strengths. The first implementation is the Energy Regional Innovation Cluster (E-RIC) program discussed below For more information

EDAI6 Challenge

Supports entrepreneurs and eliminate barriers to commercialization within regional innovation ecosystems through a $12 million competitive grant administered by the EDA in partnership with the National Institutes of Health and the National Science Foundation (NSF) Award announcements to occur in Fall 2010 For more information

Small Business Administration (SBA)Regional Innovation Clusters program

Provides up to $600,000 for business training, technology transfer, and mentoring services to selfidentified regional clusters that have in place the partnerships, technical capacity, and other assets necessary for small business growth Award announcements to occur in Fall 2010 For more information

SBAAdvanced Defense Technology program

Awards up to $600,000 to support and grow small businesses in regional innovation clusters focused on advanced robotics, cyber-security, applied lightweight materials, and other critical defense needs identified in conjunction with the Department of Defense Award announcements to occur in Fall 2010 For more information

Connects DOE, EDA, SBA, NSF, the Department of Commerce's Manufacturing Extension Partnership, the Department of Labor, and the Department of Education in joint funding opportunity of up to $130 million over five years to support a regional research center that develops and commercializes new building energy efficiency technologies and engages partners to promote broader regional energy cluster growth Award announced in August 2010 to Philadelphia-based research consortium For more information

U.S. Department of Agriculture (USDA)Rural Innovation Initiative

Seeks to pilot strategic regional planning that connects rural communities to core local and metropolitan assets and opportunities through a $176 million fund that pools and coordinates a share of resources from existing USDA programs Proposed in the Administration's FY2011 budget request For more information, see p.14 of the USDA budget summary

NSF InnovationEcosystems

Aims to support regional clusters around universities with $12 million directed at increasing the impact of promising innovations through commercialization, industry alliances, and start-up formation Proposed in the Administration's FY2011 budget request For more information, see p.4 of the NSF budget summary

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